Average Quartely Balance

In India, most of the private sector banks charge a hefty fine on their customers for not maintaining the required Average Quarterly Balance (AQB) amount in their savings accounts. When the AQB itself is quite high at 10,000 rupees for most of the private banks, the fine comes to more than 800 rupees (including surcharge) and is not a small amount by any means.

Average Quarterly balance ( AQB ) is calculated as mentioned below :

AQB = ( The sum of the end of the day balances in the quarter ) / ( Total number of days in the quarter ) must be equal to Rs.10,000.

Banks calculate the balance of the days in the three months what it is at the end of the day. Supposedly you have 1 lakh rupees in the morning and you take out 99000 rupees during the day time, your day balance would be 1000, not 1 lakh.

To have a comparison with other countries, in Singapore, the amount banks generally charge for not maintaining the monthly average balance is 2 Singapore Dollars, which comes to around 65 Indian Rupees. And that means the AQB fine banks charge in India is 12 times that of in Singapore!!

With the AQB amount made double that of what it was previously, the probability of a person defaulting on it also increases. And when the fine is levied on a huge number of customers, it results in tremendous income for the banks, probably what they are eying at.

I guess it’s high time that the Reserve Bank of India intervenes and put an end to this day time robbery, like it put a cap on ATM withdrawal fee a year back.

In the mean time, what we can do is,

1. Have less number of savings accounts as possible with private banks
2. Move your savings accounts to nationalized banks, that have lower AQB and charge less default fee

What is Core Banking?

Core Banking System or Core Banking Solution is a term that we hear very often these days. For IT and Banking folks, this term doesn’t need any explanation but for those who want to know a bit, here’s a brief overview of what it means.

Core banking is a general term used to describe the services provided by a group of networked bank branches. Bank customers may access their funds and other simple transactions from any of the member branch offices.

Previously a bank’s core operations such as keeping a ledger of various transactions, maintaining customer information, interest calculation of loans and deposits, adjustments to accounts on withdrawal and deposits of funds etc. were done manually. With the advent of ICT (Information & Communications Technology), efforts were done to automate various banking processes using software applications so as to make them simple, efficient, effortless and cost effective. Thus, the platform where ICT is used to perform the core operations of a bank, like those mentioned above, is known as Core Banking System.

In Core Banking System, software applications record transactions, maintain customer information, calculate interest on loans and deposits etc. The data, instead of huge ledgers, are stored in backend databases in digital form. Now, the same software can be installed in various branches of a bank and can be interconnected through the internet or telephone lines to form a core banking network of the bank. The advantage, a customer can operate on his account from any branch of the bank and if the bank owns Internet Banking or ATM facilities, then the customer can operate on his account from virtually anywhere.

Thus, Core Banking System has radically changed the way in which banks function. The greatest advantage of having a Core Bank System is that new features and functionalities can be easily added to the system that customers will have a whole lot of services that they can use. Electronic funds transfer between banks, online trading in the stock markets etc. are examples of this, which were unheard of in banks pre Core Banking System era.

Core Banking solutions are banking applications on a platform enabling a phased, strategic approach that lets people improve operations, reduce costs, and prepare for growth. Implementing a modular, component-based enterprise solution ensures strong integration with your existing technologies. An overall service-oriented-architecture (SOA) helps banks reduce the risk that can result from multiple data entries and out-of-date information, increase management approval, and avoid the potential disruption to business caused by replacing entire systems.

Free ATM Usage

Most of the banks charge a considerable amount to its customers when they use ATM facilities of a different bank to do transactions on their accounts. I myself have paid amounts to the tune of Rs. 61.80 (Usage Fee: Rs. 55.00, Service Tax: Rs. 6.60, Education Cess: Rs. 0.20) for such usages I have made. Part of this usage fee is paid to the bank whose ATM is been used. Considering the costs involved, I always felt that this is an obscene amount.

The irony is even if one withdraws Rs. 100, he has to pay Rs. 61.80 as usage charge. I wonder why the banks are not charging the usage charge as a percentage of the money being withdrawn, while they charge based on percentage for various other services. For example, processing fee for a service such as Balance Transfer on credit card is a percentage of the amount being transferred. The bank would say that despite the quantity of money being withdrawn from an ATM, the service is used anyway, which involves the same set of procedures and that’s why it’s a fixed charge. But here, my question is, how is it different for the processing fee on balance transfer? Isn’t the service being used and the efforts involved are same for various balance transfer amounts? But then one doesn't need to think too much to understand why the banks charge in percentage for services involving higher amounts!

Thus, reading the minds of millions of bank users of India, the RBI has directed the banks to allow free access to ATMs by April 2009. By March 2008 banks that are charging more than Rs. 20 for using a different banks' ATM will have to bring down the charge to Rs. 20. Also, balance enquiry has to be made available free of cost across all ATMs. In order to bring in transparency to the banking system, RBI has also urged the banks to inform their customers before hand, the amount they shall pay for withdrawing money from a different bank's ATM, which would discourage the customers from using a different bank's ATM.

The RBI has also pointed out that in other countries such as UK, Germany and France, customers can access all ATMs in the country, other than the ones managed by non-banks, free of charge. With this move, the Indian banking system is set for a revolution and importantly more customer focussed, it seems.

Avoid Having Multiple Bank Accounts?

A large number of people own savings accounts in several banks. Some are inherited from their previous jobs while some are opened to avoid tax deduction at source on fixed deposits. As the minimum average quarterly balance required maintaining these savings accounts increases in private sector banks, owing multiple savings accounts become a costly affair.

An increasing number of banks have hiked the average quarterly balance (AQB) in metros to Rs. 10,000; while most of them have the minimum AQB amount as Rs. 5000 in smaller cities. Thus, a lot of customer’s money is blocked to keep their savings accounts alive. For example, consider the case of a person having 5 savings accounts of AQB Rs. 10,000 each!

Secondly, having too many savings accounts and the need to maintain minimum AQB in each one of them pose the danger of not being able to meet the minimum AQB in one or two accounts, which leads to penalty charges. This is usually a huge amount in private sector banks (ICICI Bank charges Rs. 750 + Service Charge) as a penalty for not maintaining minimum AQB.

But above all, earning a paltry interest rate of 3.5% for your money in savings account, when you can earn a much higher interest of around 10% in Fixed Deposits, would not be a great idea. That is, if you have less number of savings accounts, less would be the money needed for maintaining minimum AQB in those and more would be the money available for Fixed Deposits.

“If you notice that your savings account balance is over Rs 50,000, normally you would think of transferring some money to a fixed deposit. But if there is Rs 20,000 in multiple accounts, the thought many not cross your mind”, says a financial advisor, which is very true. So it’s better to own as less savings accounts as possible.